US Trade War Against China: The Neo-Economic Terrorism

Sunday 9 June 2019

by Joseph Abraham

Ever since US President Donald Trump declared “Trade War”against China, the world is witnessing an unprecedented resurgence of protectionism which is the greatest threat to free trade and free markets in gross violation of the WTO regulations on global free trade. No wonder, Zhang Hanhui, the Vice-Foreign Minister of China, has recently termed the premeditated instigation of trade conflict by the US against China, which is the largest trade war in economic history, as “naked economic terrorism, economic chauvinism and economic bullying”. The US trade sanctions against China that is likely to aggravate the downward slide of the Chinese economy and with serious fall-outs on the world economy, should be seen as an act of blatant economic aggression and arms-twisting by the US against a developing country of Asia.

In fact the geographical coverage of US trade chauvinism is taking a wider dimension with more and more countries, including India, entering into the US “Watch List”turning global trade into a dangerous zone of economic warfare.

Following China, though in a much minor scale, India is already on the US “Trade Radar”. As the first signal of the US trade war, India, termed by President Trump as “Tariff King” has lost its “Most Favoured Nation Status”on March 4, 2019, a special trade status held by India with the US since the 1970s. The issues provoking the US for a trade war with India are : the burgeoning US trade deficit with India estimated at $27.3 billion in 2017, tariff barriers against US agriculture and certain manufactured products such as mobile phones, auto parts, transparency issues in Intellectual Property, laws requiring US companies to store data locally, controls on US e-commerce firms and on-line content providers etc. Further, US arms-twisting on India is evident from the US pressure on India to restrict defence cooperation with Russia and oil imports from Iran.

Today, the world’s two great economic super-powers, China and the US, are at loggerheads and trade discussions have come to a halt as President Trump imposed a $ 200 billion tariff hike on Chinese goods in early May this year alongwith blacklisting of the Chinese telecom giant, Huawei. With US imports from China in 2018 of about $ 539 billion, President Trump has threatened to impose further tariffs of $ 325 billion on Chinese goods.

Under escalation of US trade intimidation, recently China was forced to hit back with its own tariff hike of $ 60 billion on US products and has threatened to stop exports of rare earths including magnets whichis a strategic component for a wide range of US industries from cars and dishwashers to electronic goods and military equipment. This is particularly worrisome for the US as China produces more than 95 per cent of the world’s rare earths enjoying considerable monopoly and the US is dependent on China for almost of 80 per cent of its imports of rare earths which is so crucial for the US industry. Any restrictions by China on its exports of rare earths to the US could wreak havoc on the US industry and may take years to recover revealing the bitter economic truth that there is no winner in a trade war.

The transparency of the economic libera-lisation policies of China since the past forty years proves that the recent provocations of trade war has come more from the US than China. In fact President Trump had sounded his intention of launching a trade war against China even before he took office in 2016. Further, the US launched an investigation into Chinese trade policies in 2017 and imposed tariffs of more than $ 250 billion on Chinese products in 2018 with a threat of additional tariffs of $ 325 billion.

Judged by the track record of China to principles of free trade and compliance to WTO trade regulations, it is apparent that China has made serious efforts to resolve issues relating to transparency and intellectual property. As compared to the US, China has always opposed the systematic use of sanctions, tariffs and protectionism. Ever since China joined the WTO on December 11, 2001, despite its centralised political system under the Communist Party of China, there has been massive opening up of the Chinese economy with strong commitment and adherence to the principles of privatisation, liberalisation and globalisation. This has facilitated the deep integration of China with the world economy. The pace of economic reforms of China from 1978 till the present day is a strong testimony of the commitment of the successive three generations of the political leadership of China to free trade and transparency.

Since the onset of economic reforms in 1978 under Deng Xiaoping, the second generation leader of China after Mao Zedong, there has been rapid economic reforms in China. The service sector was considerably liberalised and foreign investment was allowed, restrictions on retail, wholesale and distribution ended. Banking, financial services, insurance and telecommunications were also opened up to foreign investment. In the early 1990s, President Jiang Zemin, the third generation of Chinese leadership, along with Premier Zhu Rongji implemented substantial economic reforms including fiscal reforms granting revenue mobilisation and expenditure powers to provincial governments. This was continued in 2002 by the fourth generation of leadership, led by Present Hu Jintao and Premier Wen Jiabo. The fifth generation came to power in 2012, when President Xi Jinping and Premier Li Kequiang, took the reins of the country and the Xi-Li administration unveiled an ambitious reform agenda in an attempt to change the country’s economic fundamentals and ensure a sustainable growth model. Xi coined the term “Chinese Dream” as his contribution to the guiding ideology of the Communist Party of China.

Even prior to the US trade sanctions against China in 2017, China was already facing sluggish growth along with severe economic, political, environmental challenges which has now been aggravated by the US trade war against China. In 2015, the Chinese economy missed its seven per cent growth target for the year by 0.1 percentage points, marking the first time in two decades that growth has recorded below the target. Investment in manufacturing and infrastructure is slowing as the nation shifts from an investment-driven growth model to one more focussed on consumer demand. Wide regional disparities in growth and development, governance issues, environmental degradation and growing unemployment of youth are other major challenges confronting China.

There is little doubt that the US trade war will have very serious adverse ramifications on the Chinese economy and on the realisation of the “Chinese Dream” envisaged by President Xi Jinping. As a fall-out of the escalation of US-China trade war, it is anticipated that the economic growth of China will decelerate in 2019 due to subdued global demand, domestic vulnerabilities and the government’s plan for a transition towards a more sustainable model. The economy is expected to grow at 6.2 per cent in 2019 before decelerating further down to 6.0 per cent in 2020.

Way Ahead

Apart from its adverse fall-out on the domestic and external sector of China, a full-blown trade war has serious implications for the entire world as it could weaken the developing countries and global economy. From the perspective of the world economy, both the Chinese and US firms are equally being harmed by the trade war and fears about further escalation have rattled global investment and stock markets.The political leadership of China is encountering the challenge of tackling the external and internal threats to its economic stability. Domestic economic instability of China from low growth calls for drastic reduction of its soaring levels of fiscal deficit and public debt particularly that of provincial governments. On the external front, China needs to neutralise the adverse effect of US trade sanctions by developing its vast internal market, enhancing trade with developing countries and initiating wider global discussions through the WTO to arrive at an international consensus against the economic terrorism of the US. Further, with threats of US trade war looming large over India, India and China need to develop mutually beneficial trade convergence through a Regional Trade Agreement (RTA) to neutralise the damages of US economic aggression.

Dr Joseph Abraham is a retired Member of the Indian Economic Service (IES) and a former Principal Adviser, Ministry of Agriculture, Government of India.